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RBA Holds Cash Rate Steady Amid Persistent Inflation Concerns

RBA holds cash rate at 4.35%, citing persistent inflation. Economic outlook remains uncertain amid mixed signals and global uncertainties. Stay tuned for more.

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In a decisive move, the Reserve Bank of Australia (RBA) has chosen to maintain the cash rate target at 4.35% during its latest board meeting, while also keeping the interest rate on Exchange Settlement balances unchanged at 4.25%. This decision comes as inflation, although significantly reduced from its peak in 2022, remains stubbornly above the desired target range.

Inflation: A Persistent Challenge

The RBA’s statement highlighted that inflation has fallen notably since 2022 due to higher interest rates which have been instrumental in balancing aggregate demand and supply. However, the pace of this decline has recently slowed. As of April, the monthly Consumer Price Index (CPI) rose by 3.6% in headline terms and by 4.1% excluding volatile items and holiday travel, indicating persistent inflationary pressures.

Economic Indicators: Mixed Signals

The broader economic data reflects ongoing excess demand within the economy, coupled with high domestic cost pressures. The labour market, while easing slightly, remains tighter than what is sustainable for achieving full employment and target inflation levels. Although wages growth appears to have peaked, it continues to exceed sustainable levels relative to trend productivity growth. Interestingly, recent data revisions indicate stronger-than-previously-suggested consumption over the past year, despite subdued output growth and declining consumption per capita as households curtail discretionary spending.

Uncertain Outlook

The economic forecast remains highly uncertain. The central projections from May anticipated that inflation would return to the 2-3% target range in the latter half of 2025, hitting the midpoint in 2026. However, recent data, including slow GDP growth, rising unemployment, and slower-than-expected wage growth, suggest a weak economic momentum. Despite this, the persistence of inflation and revised consumption figures indicate potential upside risks. The impact of recent budget outcomes on demand and the temporary reduction in headline inflation due to energy rebates add further complexity to the outlook.

The RBA notes that real disposable incomes have stabilized and are expected to grow later this year, supported by lower inflation and tax cuts. An increase in household wealth, driven by rising housing prices, is also expected to bolster consumption growth. Nonetheless, there is a risk that household consumption could recover more slowly than anticipated, leading to continued subdued output growth and a significant deterioration in the labour market.

Global and Domestic Uncertainties

On the global front, uncertainties persist, particularly regarding geopolitical tensions and their potential impact on supply chains. While there have been improvements in the outlook for the Chinese and US economies, and some central banks have eased policies, the risk of persistent inflation remains. Domestically, the lag effects of monetary policy and the response of firms’ pricing decisions and wages to slower economic growth remain key uncertainties.

Commitment to Returning Inflation to Target

The RBA remains resolute in its commitment to returning inflation to the target range within a reasonable timeframe, emphasizing the importance of maintaining medium-term inflation expectations consistent with the target. The Board acknowledges that while inflation is easing, it is doing so more slowly than anticipated and remains high. Vigilance to upside risks to inflation is crucial, and the path of interest rates that will best ensure inflation returns to target remains uncertain.

What's next?

The RBA will continue to rely on data and evolving risk assessments, paying close attention to global economic developments, domestic demand trends, and the outlook for inflation and the labour market. The Board's determination to return inflation to target remains steadfast, and it stands ready to take necessary actions to achieve this goal.

Stay tuned to Craggle News for more updates on economic and financial developments that impact your home loan rates and overall financial well-being.

Written By

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The Craggle Team

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